Question 3 (Similar to Question 2, but capital structure is different) (12pt) SuperOnline is a company composed of two divisions: online commerce and fintech. It is planning to spin off its fintech division. Currently, SuperOnline has 10 million shares of stocks trading at $170. Its debt / value ratio is 10%. It will keep its debt /value ratio constant forever (even after spin-off). Online commerce division's EBIT is expected to be 100 million at the end of this year and is expected to grow 2% every year. Fintech division's EBIT is expected to be 50 million at the end of this year and is expected to grow 7% every year. Fintech division's current debt is 150 million and it will keep its debt/value ratio constant forever (even after spinoff). EasyFintech is SuperOnlines fintech business rival and it is only in fintech business. EasyFintech's debt/equity ratio is 25%, its cost of equity is 15%. Assume all debts are riskless. Risk-free rate is 10%. Market Risk premium is 8%. Tax rate is 35%. (a) What is cost of capital for SuperOnline's fintech division? (3pt) (b) What is the fair value of SuperOnlines fintech division's equity? (3pt) ) Compute the value and debt of online commerce division of SuperOnline (3pt) (d) What is cost of capital of SuperOnlines online commerce division? (3pt) Question 3 (Similar to Question 2, but capital structure is different) (12pt) SuperOnline is a company composed of two divisions: online commerce and fintech. It is planning to spin off its fintech division. Currently, SuperOnline has 10 million shares of stocks trading at $170. Its debt / value ratio is 10%. It will keep its debt /value ratio constant forever (even after spin-off). Online commerce division's EBIT is expected to be 100 million at the end of this year and is expected to grow 2% every year. Fintech division's EBIT is expected to be 50 million at the end of this year and is expected to grow 7% every year. Fintech division's current debt is 150 million and it will keep its debt/value ratio constant forever (even after spinoff). EasyFintech is SuperOnlines fintech business rival and it is only in fintech business. EasyFintech's debt/equity ratio is 25%, its cost of equity is 15%. Assume all debts are riskless. Risk-free rate is 10%. Market Risk premium is 8%. Tax rate is 35%. (a) What is cost of capital for SuperOnline's fintech division? (3pt) (b) What is the fair value of SuperOnlines fintech division's equity? (3pt) ) Compute the value and debt of online commerce division of SuperOnline (3pt) (d) What is cost of capital of SuperOnlines online commerce division? (3pt)
